3/08/2006 @ 6:47AM

The Fall Guy Speaks

Every well-engineered fraud has a fall guy, and at Enron that was supposed to be Andrew Fastow. But in testimony Tuesday against his former bosses, Jeffrey Skilling and Kenneth Lay, Fastow exacted his revenge.

Fastow said he set up partnerships to hide Enron’s deteriorating finances at the behest of Skilling, who at one point told him “get me as much of that juice as you can” according to one account of the trial. With tens of millions of dollars in stock options dependent upon keeping Enron’s stock price high, Skilling had plenty of reasons to want that juice. So did Lay, who according to the government sold $300 million in Enron stock and in 2000 alone received 769,000 options that would be worthless if the price fell below $47 a share.

Fastow didn’t share in the stock-option bonanza at Enron. A relative unknown until he was promoted to chief financial officer in 1998, Fastow didn’t even rate a mention as a top officer in Enron’s annual proxy reports. That might have made him especially eager to catch up with his superiors–and receptive to what, in retrospect, was a monumentally stupid idea.

Here’s how it worked: In exchange for setting up partnerships that would allow Enron to “sell” poorly performing assets at a profit, Fastow would get cash payments up front. But these partnerships were flimsily capitalized, some of them with Enron’s own stock. Andy wanted some assurance he would get to keep his profits, just like his bosses were doing with their regular sales of in-the-money options.

So Fastow says he got Enron to guarantee he couldn’t lose, through the so-called “Global Galactic” side agreements with former Chief Accounting Officer Richard Causey. Skilling’s lawyers have questioned whether these hand-written notes are authentic and deny Skilling knew anything about them.

They make sense, however, in the context of a fall guy being rewarded for supplying the “juice” to keep Enron aloft.

What many observers forget is that Skilling and Lay spent a large part of the 1990s struggling to convince investors Enron was a winner. They entered into a spectacularly bad natural gas trade in England in the early 1990s that cost the company $440 million to unravel in 1997. Enron’s stock performance trailed the Standard & Poor’s 500 Index for several years before that.

When Enron began to soar in the late 1990s on volatile energy prices–volatility means more trading, and trading was Enron’s lifeblood–Skilling and Lay finally had a chance to cash in. But Enron’s investments in other operations, from broadband trading to retail energy, weren’t nearly as lucrative as the core natural gas-trading business.

It became clear Enron had to unload its money-losing ventures, but if it sold them at a loss earnings would stall, the stock price would fall and the options would become worthless again. Fastow dusted off an obscure financial tool previously used to sell credit-card receivables to separately capitalized funds (he’d probably learned about it earlier in his career at Continental Bank in Chicago) and morphed it into the infamous LJM, Chewco and Raptor partnerships.

There was nothing sophisticated about these deals: Imagine lending your brother-in-law the money to “buy” your house at a profit, and guaranteeing you’d buy it back from him if it lost value. Nobody with an elementary understanding of finance should have approved them. But Enron worked very hard to keep the details of the partnerships secret from investors, including the millions of dollars Fastow was paid for setting them up.

That helped keep the charade going until news of Fastow’s off-the-books paychecks emerged in 2001. He was forced to resign in October 2001, and a year later he was criminally indicted. He pled guilty to fraud in 2004 and accepted a 10-year term.

According to the government, Fastow reaped at least $18 million from fraudulent stock sales when the partnerships were hiding debt, a tiny fraction of what his bosses made over the same period. He made a few million more side deals and various criminal schemes, but he paid the ultimate price for having his name on the partnership documents when they failed. That’s what fall guys are for.